COMMITTED TO

IMPROVING THE STATE

OF THE WORLD

Latin America@Risk

A Global Risk
Network Briefing
The views expressed in this publication do not
necessarily reflect the views of the World Economic
Forum.

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REF: 030407
Contents

Foreword 4

Executive Summary: Economic Shocks 6

Executive Summary: Climate Change, Deforestation and Environmental Degradation 8

Executive Summary: Threats to Political Stability 10

Executive Summary: Social Inequalities within Latin America 12

3
 Foreword
This report has been prepared by the Global Risk
Network for the World Economic Forum on Latin
America (Santiago de Chile, 25-26 April 2007). It
provides the latest insights into trends, potential
consequences and mitigation relevant to four key risks
facing the region. The risks profiled are:
1. Economic shocks – How vulnerable is the region as
a whole to external economic turbulence? What
exogenous crises would risk derailing Latin
America’s growth prospects (e.g. a US fiscal crisis
or Chinese economic hard landing)?
2. Climate change, deforestation and environmental
degradation – Can the region balance the complex
trade-offs between the environment and growth?
What are the risks and opportunities for Latin
America?
3. Threats to political stability – As the power equation
shifts, what is the risk of a reversion to political
populism? What happens if there is a backlash or
retrenchment from globalization (either from within
or from major trade blocs, e.g. US or EU)? And will
corruption remain resilient to reform?
4. Social inequalities within Latin America – What is the
risk of the “inequality trap” perpetuating the twin
disappointments of income inequality and social
exclusion? With the explosion of expectations, do
perceptions of inequality match the reality?
The Global Risk Network of the World Economic Forum
is composed of an unparalleled network of industry, risk
and regional experts who work with business leaders
and policy-makers to:
• Create a framework for assessing and prioritizing
existing and emerging risks to global business over
the short and long term
• Alert key decision-makers to the impact these risks
To generate a global risk, an issue must have global
scope, cross-industry impact, and there must be
uncertainty as to how the risk will manifest itself (in
regard to the likelihood of occurrence and severity of
impact).
Over the last three years, the Global Risk Network has
engaged a wide range of experts in the economic,
geopolitical, environmental and societal fields to explore
the nature of the risk landscape facing governments,
societies and businesses. In conjunction with its
partners, the Global Risk Network has identified 23
core global risks to the international community over
the next ten years.
These core global risks have been assessed in terms of
likelihood and severity (see Figure below). In addressing
likelihood, actuarial principles were applied in the few
cases where sufficient data existed; in most cases only
qualitative assessments, based on expert opinion, were
possible. Although some risks are inherently long term
(such as climate change), and others (such as an oil-
price shock) could occur in the near term, all risks were
evaluated within a ten-year time frame.
A more detailed description of the core global risks can
be found in the Global Risks 2007 report, published for
the World Economic Forum Annual Meeting in Davos
(and available at
www.weforum.org/en/initiatives/globalrisk).
The World Economic Forum Global Risk
Network has identified 23 core global risks
over a ten-year time frame:
The 23 Core Global Risks: 10-year Horizon
Increasing consensus around risk
250 billion - 1 trillion more than 1 trillion

Retrenchment from
Asset price collapse
might have on their environments globalization

• Assist leaders in their reflection on how risks may be

mitigated at the global, regional, industry and Pandemics
Interstate and
civil wars
Oil price shock
company levels China economic hard landing
Severity (in US$)

Middle East
• Transform these global risks into business instability
Transnational crime and corruption
Breakdown of CII
Fall in $
opportunities Coming Chronic disease in
50-250 billion

fiscal crises Climate change developed countries

NatCat: Tropical storms Liability regimes
NatCat: Earthquakes Developing world disease
NatCat: Inland flooding Loss of freshwater services
Failed and failing states
10-50 billion

Proliferation of WMD
Nanotechnology
International terrorism
2-10 billion

below 1% 1-5% 5-10% 10-20% above 20%

Likelihood

Note: Likelihood was based on actuarial principles where possible. For most risks, however,
qualitative assessment was used.
Source: World Economic Forum Global Risks 2007

4
 One approach to thinking about interconnectedness is
What are Global Risks? to assess correlation – the matrix portrays the strength
Our definition: non-business risks that of the macro correlations perceived by experts to exist
between the global risk issues assessed above.
affect business (i.e. not operational,
project or financial risk)
Within the framework of these 23 interconnected global
risks tracked by the Global Risk Network, four risks
- that can be strategic, exogenous and were identified by Latin American participants at the
systemic World Economic Forum Annual Meeting in Davos as
being critical to the future of the region (in terms of their
- that are highly interdependent (i.e. do not likelihood and/or the severity of their impact). Risks to
manifest in isolation) Latin America were identified, assessed and ranked
with each of the following risk families being
- that are characterized by uncertainty, sharp represented: Societal, Geopolitical, Economic and
discontinuities, non-linearity (power law Environmental. Risk correlation was accommodated in
distributions) and lack of proportionality the assessment, with the selected risks being framed
to highlight the potential for regional contagion.
- that can’t be predicted (but can be
managed) This is not to suggest that other issues facing Latin
America are any less serious or less potent; this report
does not propose to rank or prioritize the risks. Rather,
the study is intended to analyse some of the critical
issues facing the region and distil expert insight in a
It is a central tenet of work conducted by the Global concise and meaningful way.
Risk Network that global risks do not manifest
themselves in isolation. This was apparent when the As for global risks, it is clear that the four threats to
domino effects of Hurricane Katrina briefly shook the Latin America’s future profiled herein are not separate,
global system. More recently, the connections between isolated issues on the risk landscape; their drivers,
two of the major issues for public policy and private triggers and consequences are highly interconnected.
enterprise – energy security and climate change – have For a region characterized by increasing
reinforced the sense that global risks share a common interdependence, the imperative is for collective action
lineage. to mitigate these shared risks. Ring-fencing is no longer
an option.

The Correlation Matrix

Key: Current account
Oil price shock deficit/ Fall in US$
Proliferation of WMD
correlation
Stronger

Spread of International terrorism

liability regimes
Pandemics

Loss of freshwater
services Climate change

Breakdown of CII
Retrenchment from
globalization
Coming
fiscal crises
China economic
hard landing
Failed and
failing states
Middle East instability

NatCat: Tropical storms

Developing world disease
Emergence of (HIV/AIDS, TB, malaria)
nanotech risks
NatCat: Inland flooding
Asset prices/ excessive
indebtedness NatCat: Earthquakes
Transnational crime Chronic disease in
and corruption Interstate and developed countries
civil wars

Source: World Economic Forum Global Risks 2007

5
 Latin America@Risk

COMMITTED TO
IMPROVING THE STATE
OF THE WORLD

Executive Summary:
Economic Shocks

How vulnerable is the region as a whole to external economic turbulence? What exogenous crises would risk derailing Latin
America’s growth prospects (e.g. a US fiscal crisis or Chinese economic hard landing)?

Risk The mood is upbeat; the consensus is for a repeat of a Goldilocks year of growth in 2007/8. With this
favourable economic outlook, a population of around 550 million and GDP of US$ 2.26 trillion (just less
than China), Latin America as a whole is far better placed to withstand an economic downturn than it was
in the 1980s and 1990s.

Yet three ugly bears are threatening the Goldilocks scenario: a US housing recession and the beginning
of a credit crunch; a possible China-slowdown; and/or a global reappreciation of risks (which could occur
in either an orderly or disorderly manner).

Given Latin America’s export growth and leverage to commodity prices, the region is particularly
vulnerable to the risk of a hard economic landing. For instance, any slowdown in industrial production in
the US or a deceleration of China’s growth will hit the economies of Mexico and Brazil (which account for
two-thirds of regional GDP).

Important Trends Recent economic growth rates in the region exceeded 5%, more than double the region’s long-run
average of 2.5%.

This average region-wide performance masks large differences between and within countries. In particular,
the international environment has benefited exporters of high-demand commodities and resources,
especially in South America and the six petroleum net-exporting countries.

Growth in national income (7.2%) again exceeded GDP expansion. In addition, other factors, such as
growing investor and consumer confidence after several years of sustained growth, low real interest rates,
a stronger boost to public spending and an expansion in total wages, have helped to make domestic
demand an additional engine for growth.

Economic expansion is expected to slow slightly in 2007, with the regional GDP growth rate forecast at
around 4.7%. If these projections are borne out, the region’s per capita output will show a cumulative gain
of some 15%, or 2.8% per year, in the 2003-2007 period.

At the beginning of the 1990s, growth in Latin America was fuelled by capital inflows; now it is led by
exports and many countries have capital account surpluses. Thus the region is less vulnerable to external
shocks.

In contrast to previous cycles, governments appear to have avoided expansionary fiscal policies, opting
to build up primary surpluses and pay down debt. The current phase is noteworthy for the decreasing
dependence on external savings and the reduction of sovereign debt – both of which provide a “margin
of safety” in the event of external disturbances.

While there are some storm clouds on the horizon, an attitude of “cautious optimism” reigns (though it
should be noted that recent growth needs to extend before a sustained growth trend can be confirmed).

6
Consequences While the consensus economic outlook is upbeat, many Latin American countries remain vulnerable to the
vagaries of world commodity and financial markets. A global economic slowdown would seriously affect
the region’s growth and the well-being of its population.

In a number of cases – Mexico, Venezuela, Ecuador and Colombia in particular – world oil and commodity
prices are inextricably linked to social, political and economic realities (e.g. in the early 1980s, Venezuela
experienced a deep economic crisis and widespread civil unrest when the oil price fell dramatically,
exacerbated by excessive state spending on unproductive industries).

A key danger for Latin America lies in the so-called “regressivity” of financial crises; in simple terms, crises
are socio-economically regressive due to the massive (and often wasteful and inequitable) diversion of
fiscal resources to resolution mechanisms and have a disproportionate affect on the poorest members of
society who lack a safety net.

Mitigation Continued fiscal restraint will help Latin American countries weather future turbulence and the inevitable
downturns (e.g. via increasing public sector savings and paying down or restructuring foreign debt), as will
adopting countercyclical fiscal policies, having more flexible exchange rate regimes and reducing the
“dollarization” of the financial system.

As crises cannot be prevented entirely, equitable and efficient crisis resolution mechanisms should be in
place, along with safety nets to protect the most disadvantaged members of society.

Achieving better regional integration and sustainable internal growth will also improve resilience to
exogenous shocks. In particular, Latin American countries should aim to exploit their comparative
advantages in established niches such as biofuels and renewable energy.

Businesses in the region should play a more active role in helping to build economic resilience by attacking
shortcomings such as labour and capital inefficiencies, poor quality education and low levels of research
and development.

Public-private partnerships (PPPs) should be established to focus on building necessary infrastructure over
the long term, particularly in rural areas and underdeveloped regions. A public-private agency should be
created to concentrate national efforts on attracting investors and promoting innovation by offering tax
credits for R&D spending.

Improved access to financial services (i.e. “bancarizatión”, credit and insurance) will help buffer the small
to medium-sized enterprise sector against external shocks. This would require better creditor rights, credit
bureaus, prudential regulation and the innovation of financial products.

Resources United Nations Economic Commission for Latin America and the Caribbean (http://www.eclac.cl/)
World Bank – Latin America (www.worldbank.org/lac)
Inter-American Development Bank (http://www.iadb.org)
Inter-American Dialogue (http://www.thedialogue.org)
Organization of American States (http://www.oas.org/)
Latin American Studies Association (http://lasa.international.pitt.edu/)
Washington Office on Latin America (www.wola.org)
Latin America Working Group (www.lawg.org)

China’s Share of Latin American Exports

China becoming a more important destination for many countries
Chile
Peru
Argentina

“
Cuba
The new year will begin with the Brazil

greatest divergence for a Uruguay

Costa Rica
generation between the general Paraguay
“
view of global risks and risks as Venezuela
Ecuador
priced in financial markets. Bolivia
Colombia
Latin America & Carribean-2005 (3.5%)
Lawrence Summers, Charles W. Eliot Mexico
El Salvador Latin America & Carribean-1990 (0.9%)
University Professor, Harvard
Guatemala
University, USA
Honduras

0 2 4 6 8 10 12%

1990 2005 Exports to China (percentage of total exports)

Source: ECLAC

7
 Latin America@Risk

COMMITTED TO
IMPROVING THE STATE
OF THE WORLD

Executive Summary:
Climate Change, Deforestation and Environmental Degradation

Can the region balance the complex trade-offs between the environment and growth? What are the risks and opportunities for
Latin America?

Risk While Latin America has always experienced great climatic diversity, research confirms that largely regular
and predictable temperature and rainfall patterns are changing, becoming less predictable and often more
extreme.

The potential direct impacts of anthropogenic climate change include increased frequency and severity of
extreme weather events, drought, increasing food insecurity, disease and population displacement.

Indirect impacts of global climate change could have dramatic effects on demand and investment
patterns, as well as interrupting business operations and supply chains.

At the same time, opportunities will be created by the need for new investments, for example in biofuels,
alternative energies and carbon storage.

Important Trends Trends in Latin America’s climate change risk depend on global drivers: global hydrocarbon consumption
and deforestation. Both are systemic and entrenched.

Current scientific literature argues convincingly that warming and its effects are taking place more rapidly
than previously believed. In particular, the report entitled “Up in Smoke? Latin America and the Caribbean,”
the third report from the Working Group on Climate Change and Development, has provided the following
significant evidence for impacts of regional climate change:

Evidence of likely glacier melt and impact on water availability: around 35% of the world’s
freshwater is found in Latin America. Glacial retreat and melting in the Andes (due to warming) will change
river flows and threaten water supplies for people, industry, agriculture and nature. Disputes over access
to water resources may increase as a consequence of climate change. One can no longer speak of
“eternal ice,” particularly in the Venezuelan, Colombian and Peruvian Andes.

Evidence of the impact of illegal logging and deforestation: a substantial contributor to carbon
build-up stems from deforestation – about 25% of net emissions – and the Amazon Basin is a prime
source. The total area of forest is 400 million hectares which could be absorbing 2 billion tons of carbon
per year. Moreover, forests act as natural watersheds and development can worsen the impact of flooding
(e.g. flooding during Hurricane Stan in El Salvador, 2005). Ironically additional stress is coming from the
rising demand for biofuels which, if not properly managed, could become an increasing cause of rainforest
conversion in countries like Brazil (biofuels are already being dubbed “deforestation diesel”).

Hurricanes and tropical storms are likely to increase in intensity: with 26 tropical storms and 14
hurricanes, the 2005 hurricane season is rated as one of the most active and destructive in history. While
the long-term trend remains unclear, the risk is that global warming exacerbates El Niño and La Niña
effects.

Consequences In the “baseline” global scenario of doubled atmospheric carbon concentration, regional temperature rises
of 2-5° C exacerbate food, water and weather insecurity. Effects are disproportionately borne by the poor
(e.g. leading to more poverty and disease). While growth may slow, the largest consequences may be
distributional and humanitarian and may lead to a social backlash and political instability.

The effects of climate change on global demand and investment patterns will only become clear over the
next 15-50 years.

The impact of climate change in Latin America could have serious consequences for the rest of the world
(e.g. if global warming leads to a long-term drying out and die-off of the Amazon rainforest, which could
alter the global carbon balance).
8
Mitigation Latin America is well positioned to become the global leader in biofuels and renewable energy, especially
in countries like Brazil (e.g. with the refining of sugarcane) and Argentina (e.g. soybeans), although the long-
term effects on water availability need to be understood. Wealthy countries could finance production
projects in poor countries and open up their markets to their products as an alternative to providing aid.
Mexico also has the opportunity to become a research and development hub for new technology relating
to renewable energy.

Latin America needs to be freed from a one-size-fits-all approach, as effective responses to climate change
will differ depending on local circumstances. The greatest challenge is to build climate resilience, and to
secure livelihoods at the local level as suggested by the UN Working Group on Climate Change and
Development:

Cut greenhouse gas emissions. Developed countries need to meet their commitments for reducing
greenhouse gas emissions, with milestones put in place such that industrialized countries can reach cuts
of up to 80% by 2050.

Eliminate illegal logging and deforestation. With the assistance of the developed world, Latin
American countries should also implement sustainable development policies that prioritize both energy
efficiency and renewable energy. To help mitigate climate change and maintain valuable ecosystems, illegal
logging should be eliminated (e.g. using satellite imagery) and deforestation prevented (e.g. by way of
innovative programmes such as Family Forest Guard in Colombia). Natural forests have enormous value
left standing, a value which will become realizable as the carbon market expands.

Map regional vulnerabilities. There is an clear need to develop detailed maps of the complex impacts
of global warming, integrating climate-change-related risks with other threats. All policies and programmes
should face the test of whether they will leave people in Latin America more or less vulnerable to the effects
of global warming.

Support community-based coping strategies and disaster risk reduction. Many donors prioritize
“technological fixes”. But promoting disaster reduction at the local level by supporting community-coping
strategies is far more effective and yields immediate benefits that stretch beyond just tackling climate-
driven disasters. “Good adaptation” also makes for “good development”.

Apply appropriate standards to business. Corporate involvement in Latin America in such sectors as
energy, logging, mining, water and the construction of infrastructure, such as pipelines and transport links,
should adopt rigorous sustainable development principles.

From a global perspective, the World Economic Forum and the World Business Council for Sustainable
Development are spearheading efforts by a unique group of global companies to contribute a business
voice to the G8+5 Gleneagles dialogue on climate change, clean energy and sustainable development.

Resources International Institute for Environment and Development (http://www.iied.org)

Intergovernmental Panel on Climate Change (http://www.ipcc.ch/)
Hadley Centre for Climate Prediction and Research (http://www.metoffice.com/research/hadleycentre/)
National Center for Atmospheric Research, USA (http://www.ncar.ucar.edu)
Pew Climate Center (http://www.pewclimate.org)
The Carbon Trust (http://www.thecarbontrust.co.uk)
Centro de Previsão de Tempo e Estudos Climáticos (http://www.cptec.inpe.br/)

The Economic Impact of Global Climate Change

Projections indicate reductions in GDP per capita of

5.3% to 11.3% by 2200, resulting from warmer temperatures

“
0
There are three choices:
Percentage loss in GDP per capita

mitigation, adaptation and suffering.

“
We will do some of each. But we
can still choose the mix.
-5

-10

John P. Holdren, Director, -15

Woods Hole Research Center, USA

-20
0 1 2 3 4 5 6 7 8 9
Rise in global mean temperature ( C)
Baseline scenario:
7.4 increase by 2200

Source: Stern Review on the Economics of Climate Change

9
 Latin America@Risk

COMMITTED TO
IMPROVING THE STATE
OF THE WORLD

Executive Summary:
Threats to Political Stability
As the power equation shifts, what is the risk of a reversion to political populism? What happens if there is a backlash or
retrenchment from globalization (either from within or from major trade blocs, e.g. US or EU)? And will corruption remain
resilient to reform?

Risk While Latin America has benefited from the spread of democracy, external perceptions of instability are
exacerbated by anxieties about political volatility, corruption and an emerging wave of populism in some
countries.

There is a growing political divide between countries that want greater participation in the world economy
and those that reject economic liberalization and free trade, threatening regional harmony and trade
integration.

Increased interdependence means the risk of contagion from pockets of regional political instability is high.
Opinion polls in the region show a worryingly low approval rating for vital institutions – while Chile, Brazil
and Mexico have largely managed to differentiate themselves, many other countries in the region have
failed to avoid the tar brush of poor governance (and thus suffer from very low levels of legitimacy).
Achieving regional political stability, a necessary precursor for economic development, is difficult in such
circumstances.

Outside perceptions of geopolitical risk are high (e.g. a leading insurer ranks four Latin American countries
in the “top ten” global political hotspots). Despite the negative headlines about a “new left-wing political
landscape”, 2006 saw ten democratic elections in Latin America with over 58% of the people agreeing
that democracy is the best system of government (Latinobarómetro). The reality of political risk in Latin
America is that it is much more about stability and quality of governments than about mechanisms of
democracy (OAS).

Important Trends The level of stability of democratic regimes in Latin America during the past two decades is unsurpassed
in history. However, questions continue to be raised about the quality and inclusiveness of institutions, the
impartiality and accessibility of justice systems and the efficacy of the state.

Populism again appears to be gaining force in both the developing and developed worlds, as the diffuse
benefits of globalization (no matter how great overall) remain less visible than well-publicized concentrated
dislocations. N.B.: Some believe that inequalities are beginning to diminish. Other experts say they are
growing. In the end, what matters are issues related to the perception of unfairness.

After Latin America’s economic emergence from its “lost decade” during the 1980s, the 2001-02
economic downturn triggered an unexpected backlash against pro-market reforms along with a
movement to restore the protectionist policies of the past. Nevertheless, fiscal prudence and open
borders have thus far remained in force for all but a few countries.

Regional trade blocs or agreements include the Mercosur and the Andean Community of Nations (CAN),
as well as the G3 and the Central American Free Trade Agreement (CAFTA). However, major
reconfigurations are taking place along opposing approaches to integration and trade; Venezuela has
withdrawn from both the CAN and G3 in lieu of the Mercosur, a bloc which nominally opposes any Free
Trade Agreement (FTA) with the United States. On the other hand, Mexico is a member of NAFTA, Chile
has signed a FTA with the United States, and Colombia’s and Peru’s legislatures have approved a FTA
with the United States and are awaiting its ratification by the US Senate.

While trading blocs such as the US and EU have long been champions (and beneficiaries) of economic
liberalization, recent populist sentiments suggest a growing appetite for protectionism. The open question
is: to what extent will the US/EU become more like a populist Latin America, rather than Latin America
becoming more like the US/EU?

Political corruption, illicit trade (especially in narcotics) and organized crime rank higher as risks in Latin
America than elsewhere in the world. The “informal” economy accounts for a huge 38% of GDP in the
region, compared with 16% for China and 26% for India (informality means tax evasion, corruption, unfair
competition and organized crime).
10
Consequences While the elites have become more globally interconnected, the poor and lower middle class in Latin
America are still largely disconnected and do not feel the benefits of globalization and liberalization. The
mismatch of interests and/or perceptions of globalization could lead to an endogenous backlash,
protectionism and social and political tensions.

Exogenous protectionism (e.g. continued WTO/Doha Round stalling, EU agricultural subsidies) and any
retrenchment from globalization by the US could trigger a global slowdown, with severe economic and
political impacts (particularly in developing regions like Latin America).

The socio-political consequences of such a backlash against globalization are not clear or consistent in the
Latin American context, or indeed globally. Nevertheless, it can be assumed that any retrenchment towards
populism and protectionism would significantly curtail the appetite for FDI in Latin America among foreign
investors.

Mitigation Democratization has been a necessary but not sufficient condition to ensure political stability. The next step
is to professionalize the public bureaucracy (e.g. Chile is a leader in moving along this path) and strengthen
institutional capacities in order to bring about greater accountability and transparency. Gaining legitimacy
is vital.

Both bilateral and multilateral trade deals should be pursued to strengthen regional ties and gain an ever-
increasing share of world trade. Despite the political volatility in some countries, the region should not allow
political differences to derail integration.

Deeper regional integration within Latin America is essential to help achieve the scale necessary to build
better infrastructure links, and strengthen regional agreements, institutions and governance. There is much
scope to boost regional cooperation in strategic sectors such as energy and tourism (just as there has
been growing collaboration between the police and the military in the region in the struggle against
organized crime, particularly drug trafficking). There are also opportunities for intraregional cooperation on
social protection and education initiatives.

The energy sector, particularly non-petroleum products and biofuels, could also play a leading role in
enhancing regional integration (e.g. planned US$ 25 billion natural gas pipeline connecting Venezuela with
Brazil, Argentina, Bolivia, Paraguay and Uruguay).

To curb corruption, there is a need to focus on campaign finance reform; greater transparency in public
bidding (e.g. using online systems); the legalization of lobbying and its regulation; greater transparency in
government relations, reducing overregulation; and increasing an “absolute” anti-corruption culture inside
companies. Thus far, partial reforms have yielded partial results.

Resources Inter-American Dialogue (http://www.thedialogue.org)

Organization of American States (http://www.oas.org/)
Latin American Studies Association (http://lasa.international.pitt.edu/)
Washington Office on Latin America (www.wola.org)
Latin America Working Group (www.lawg.org)
Center for the Opening and Development of Latin America (http://www.cadal.org/)
Instituto de Ciencia Política Hernán Echavarría Olózoga (www.icpcolombia.org)

The Link Between Corruption and Global Competitiveness

More competitive nations tend to have lower levels of corruption

7
(higher indicates less diversion of funds)
Score on “Diversion of Public Funds”

“ Finland

“
6 Switzerland
The 800 pound gorilla in the Denmark

room is protectionism. 5 India

Mexico China United States
Brazil
Russia
4 Venezuela
Stephen S. Roach, Chief Economist
Cameroon
and Director, Morgan Stanley, USA 3
Chad

1
1 2 3 4 5 6 7

Global Competitiveness Index 2006 Score

(higher indicates more competitive)

Source: Analysis of World Economic Forum, The Global Competitiveness Report 2006

11
 Latin America@Risk

COMMITTED TO
IMPROVING THE STATE
OF THE WORLD

Executive Summary:
Social Inequalities within Latin America

What is the risk of the “inequality trap” perpetuating the twin disappointments of income inequality and social exclusion? With
the explosion of expectations, do perceptions of inequality match the reality?

Risk Economic inequality and social marginalization are the greatest risks facing Latin America. These
longstanding twin disappointments continue to hamper the region’s progress – social cohesion and
inclusive economic development are joined at the hip – one cannot exist without the other.

Latin America is the most unequal region in the world (not only in terms of income distribution, but in terms
of access to education and access to credit).

While poverty is reducing overall, perceptions of rising inequality remain a lightning-rod issue: over 70% of
people in Latin America perceive income distributions as either “unfair” or “very unfair” (Latinobarómetro).
In addition to an acute awareness of local poverty versus local wealth, perceptual disparities regarding
local poverty versus global wealth are heightened by the increased mobility of people, Internet access and
24-hour news flows.

Important Trends Over the past three years Latin America has enjoyed its strongest cycle of economic growth in three
decades, with average growth rates exceeding 4% (versus an average annual growth rate of only 2.2%
between 1980 and 2002). Great gains have been made in combating issues such as food insecurity (with
the proportion of undernourished people falling from 13% in 1990 to a projected 6% in 2015).

For many Latin Americans, however, conditions have not improved substantially and a large proportion
still await the promised fruits of progress (on balance, poverty and inequality ratios have been stagnant,
while in some countries extreme poverty worsened during the early years of this decade).

While the region has grown, the “employment content” has been low, which has contributed to
maintaining inequality.

World Bank data reveals that inequality in the least unequal country in Latin America is higher than the
most unequal country in Eastern Europe and the industrialized countries.

Access to quality water and sanitation remains highly unequal, as investment in infrastructure has lagged
that in other countries.

Only 10% of the adult population have access to basic financial services such as credit and insurance
(especially lacking in the rural sector), and economic development remains hampered by narrow and
shallow financial markets (e.g. large proportions of lower-income population remain “unbanked” and in
twelve Latin American countries “dead capital” – untitled/immobilized assets – amounts to US$ 1.2 trillion)

Consequences The forces of globalization will continue to enhance overall wealth, but will perhaps also act to magnify
wealth inequalities. If perceptions of inequality and exclusion are not addressed, they will continue to
manifest themselves as social unrest, rising crime, disenfranchisement and political polarization. The
widespread perception that good-quality schools, jobs and medical care are reserved for the few is
incompatible with the ideal of greater social cohesion (Inter-American Development Bank).

Latin America faces the immense task of educating, employing and integrating its poorest populace (25%
of the population live on less than US$ 2 per day). The management of this will determine whether the
region enjoys a “demographic dividend” or faces a “demographic liability” in terms of continued unrest and
underperformance.

In the long term, socio-economic imbalances can feed a vicious circle of despair if disadvantage is
transmitted across generations (UNDP); for example, if there is continued failure to provide opportunity for
people to develop skills and knowledge to enter the global economy. Business cannot survive in such a
failed society.
12
Mitigation While inequality is complex and has deep historical roots, it is not deterministic – there are no immovable
structural features that prevent Latin America from following in the economic footprints of successful
developing countries in Asia (while avoiding the missteps of failed states in Africa). Because levels and
patterns of inequality vary substantially, public policies, strategies and actions will also be different in each
country.

Decisive action and political will to reform in the face of vested interests are essential. The business sector
has the capacity to become a key catalyst for change. A break from history is possible.

Government and business should not ignore the opportunity that exists in educating, integrating and
mobilizing the region’s poor, both as a source of labour and new markets (some 75% of consumers are in
the lower middle class or low income brackets).

Education is the only sustainable solution to social inequality; in particular a democratization of quality
education is required, with well-trained teachers, better use of technology (e.g. for rural areas), along with
reform to ensure the right incentives are in place for both teachers and students (e.g. income transfer
programmes could be made conditional on children remaining at school), and targeted demand
programmes such as Brazil’s Bolsa Familia, Mexico’s Oportunidades (formerly Progresa) and Colombia’s
Familias en Acción

Leaders should promote active social policies in favour of low income households (e.g. protection of
property rights), reconciled with macroeconomic stability, sound fiscal policies and efficient tax collection.
An important milestone would be to enhance access to basic healthcare, good quality education from pre-
school level and universal social security (i.e. “levelling the playing field” as well as “getting people onto the
playing field”).

Small to medium-sized enterprises are likely to play a vital role in providing jobs, as they represent 40-60%
of employment and 40-50% of regional GDP.

Reduced regulation would encourage the banking and insurance sectors to extend affordable credit and
insurance products, while institutions such as the Inter-American Development Bank aim to triple micro-
credit in the region to US$ 15 billion in five years.

To achieve the Millennium Development Goals, the proportion of people without sustainable access to safe
drinking water and adequate sanitation needs to halve by 2015, which is achievable by improving the
capacity and efficiency of providers; increasing investments in water and sanitation (to exceed 0.2% of
GDP); introducing innovative mechanisms for commercial financing; revising tariff structures and improving
collection; expanding access; and redefining the role of the private sector in service provision (e.g. by
facilitating public-private partnerships).

Resources Latinobarómetro (www.latinobarometro.org/)

United Nations Economic Commission for Latin America and the Caribbean (http://www.eclac.cl/)
World Bank – Latin America (www.worldbank.org/lac)
Inter-American Development Bank (http://www.iadb.org)
United Nations Development Programme (http://www.undp.org/regions/latinamerica/)

Inequality across the Region Is Down Slightly Since 1990

0.65

Countries in which inequality increased

Brazil

0.60
Honduras
Colombia
Gini coefficient, 2003/2005

Latin America*
0.55
Chile faster than average
Mexico GDP growth
Argentina
Ecuador
slower than average
0.50 Panama GDP growth
Venezuela
Paraguay El Salvador

Costa Rica

0.45 Uruguay

Countries in which inequality decreased

0.40
0.40 0.45 0.50 0.55 0.60 0.65

Gini coefficient, 1990

Source: Economic Commission for Latin America and the Caribbean, World Bank

13
 Acknowledgements

This document was prepared by the Global Risk team at the World Economic Forum, in partnership with the Latin
America team.

We also benefited from the contributions of the following experts who participated in a series of workshops and
interviews in Davos, São Paulo and Mexico City, and to whom we wish to extend our sincere gratitude.

Sebastián Bagó José Miguel Insulza Ricardo Ubiraci Sennes

President Secretary-General Prospectiv
Laboratorios Bagó SA Organization of American States
(OAS) Jorge A. Uribe Echavarria
Willem Bröcker President
Global Managing Partner Felipe Larraín Bascuñán CEAL
PricewaterhouseCoopers Professor of Economics
Catholic University of Chile Britt Zarling
Marita Carballo Manager, Global Communications
President, EOS Gallup Europe and Moisés Naím Manpower
Member of the Board Editor-in-Chief
Gallup International Foreign Policy Magazine

Juan Carlos Eichholz C. Alec Oxenford

Founder and Director, Center for Founder
Strategic Leadership DeRemate.com
University Adolfo Ibañez
Enrique M. Pescarmona
Eduardo S. Elsztain President
Chairman Corporación Impsa
IRSA Inversiones y
Representaciones Alberto Pfeifer
Executive General Coordinator
Clarisa Estol Conselho de Empresarios da
Chairwoman and Chief Executive America Latina (CEAL)
Officer
Banco Hipotecario SA Alejandro Ramírez
Chief Executive Officer
Rafael Fernández de Castro Cinepolis
Academic Dean
Technological Autonomous Institute Rafael Rangel
of Mexico (ITAM) President
Monterrey Institute of Technology
L. Enrique García and Higher Education (ITESM)
President and Chief Executive
Officer Sergio Sarmiento
Corporación Andina de Fomento Editor-in-Chief and Vice-President,
(CAF) Editorial Board
TV Azteca SA de CV
Peter Hakim
President Ricardo Young Silva
Inter-American Dialogue President
Ethos Institute

14
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